Residential rental property developers and GST/HST obligations

Construction or substantial renovation of a residential rental property can result in an unexpected Goods and Services Tax/Harmonized Sales Tax (GST/HST) reporting obligation and liability. This applies to anyone from a lone person building a small residential rental house to developers constructing large residential apartment towers.

The applicable rules are complex, vague and subject to interpretation. Over the last few years, we have seen a notable increase in Canada Revenue Agency (CRA) audit activity in this sector, resulting in developers paying far more taxes than what they originally budgeted for.

Who is required to self‑assess GST/HST?

Any person who has constructed or substantially renovated a property (herein referred to as a “builder”) and leases the property to an individual on a long‑term residential basis is required to remit GST/HST on the fair market value of the property (known as a “self‑assessment”). Excluded from this rule are builders who use the property for their own personal home or lease it to a relative.1

The term “substantial renovation” essentially means a person has replaced most of the existing interior of a building or unit. The law does not specify a specific percentage of renovation, but it is the CRA’s administrative policy to accept 90 per cent or more as “substantial”.2

Three steps to the self‑assessment process

Step 1: If you are required to self‑assess, you can recover the GST/HST you paid on the cost of land, building and/or renovation costs (with some exceptions). If you are registered for GST/HST, you can recover GST/HST paid via the claiming of input tax credits on your GST/HST return. If not registered for GST/HST, you can still recover GST/HST paid, but you must wait until the building is substantially completed and file for a special rebate for the recovery.

Step 2: You must give the CRA GST/HST on the fair market value of the building at the later of the time you enter into your first lease with an individual and the time the building is substantially completed. This means if you enter into the first lease with a tenant but your building is not yet 90 per cent completed, you do not have to remit GST/HST until you reach the 90 per cent mark. Alternatively, if your building is 90 per cent completed when you enter into your first lease, the self‑assessment date is the date of the first lease.

Step 3: There is a federal new residential rental property rebate available to recover a small portion of the GST cost from Step 2. Ontario offers a much higher provincial rebate and is the only province currently offering a rebate of this kind.

CRA audit activity on development projects

The CRA has confirmed it has a real property GST/HST task force that monitors residential construction projects in Canada. As a result, audit activity here has increased. Projects appear to be flagged by the CRA for audit review in two instances:

1. When the taxpayer is registered for GST/HST and claims input tax credits for the GST/HST paid on development costs, and
2. When the taxpayer files the new residential rental property rebate.

Once flagged, a CRA auditor will contact the taxpayer with a list of in‑depth questions about the development project. It is advisable to engage a GST/HST specialist to help gather and present the necessary information to the auditor. Experience in dealing with auditors can help avoid potential misunderstandings and unwelcomed reassessments.

Common CRA audit reassessment issues

Baker Tilly advisors have assisted many taxpayers facing GST/HST audits and reassessments. From our experience, the most common areas of reassessment are:

• Disputes about fair market value. The CRA has certified property appraisers who will review all information provided to an auditor and determine if the reported fair market value is reasonable. Often, the CRA determines a higher value.
• Assessing GST/HST “on top” of a valuation that states it is “tax included.” As of June 2022, the CRA has taken the position that an appraisal of a property cannot be stated as tax included, resulting in large reassessments. This internal CRA policy is currently being challenged by many practitioners across Canada.
• Input tax credits denied. The CRA may deny eligible input tax credits on costs incurred after the self‑assessment date, such as (but not limited to) GST/HST paid on invoices related to construction holdbacks.
• Dating of the self‑assessment. The CRA may determine you should have self‑assessed earlier and backdate the GST/HST collected, resulting in interest, potential penalties and denied input tax credits.

Four practical tips to reduce the chances of a CRA reassessment

While there’s no way to fully guarantee you will not be selected for a reassessment, there are a few key steps you can take to minimize the possibility of this.

1. Engage a certified appraiser (certified by the Appraisal Institute of Canada) to provide a professional appraisal and determination of your property’s fair market value. In some cases, the CRA has attempted to apply gross negligence penalties when taxpayers used their own calculation of value and determined a much higher value. If you obtain an appraisal, ensure the valuator addresses whether the GST/HST is excluded or included within the valuation document.
2. Maintain good books and records. Ensure your books and records are audit‑ready and purchase invoices meet all CRA documentation requirements.
3. Ensure you can clearly demonstrate the date you were required to self‑assess. If you entered into leases with individuals before your building was 90 per cent complete, maintain records such as construction logs, occupancy permits and other supporting documentation to prove when you hit the 90 per cent milestone.
4. Engage a GST/HST specialist at the planning stage of your project to explain the process, keep you up‑to‑date on new developments and ensure you are audit‑ready.

Start with a solid foundation

In construction, one must always begin with a solid foundation. The same goes for tax considerations and compliance. If you are planning to develop or substantially renovate a residential rental property of any size, Baker Tilly’s GST/HST specialists can provide valuable insights and clear advice right from the very beginning.

Likewise, with our extensive experience in supporting clients subject to reassessment, we can guide you through the often daunting CRA audit and appeal process. If the CRA ever calls, we can be your first line of defence, helping you avoid unnecessary stress and unwanted consequences.

1. 1 The term “builder” is defined in subsection 123(1) of the Excise Tax Act (ETA) to exclude individuals who supply the complex “not in the course of a business or adventure in the nature of trade.” Further to this, subsection 191(5) of the ETA excludes an individual builder who uses the complex “primarily as a place of residence for the individual, an individual related to the individual or a former spouse or common‑law partner of the individual.” The term “related” refers to persons related under subsections 251(2) to (6) of the Income Tax Act.
2. 2 See the CRA’s GST/HST Policy statement B092 Substantial Renovations and the GST/HST New Housing Rebate.